Triggering Coverage For Construction Defect Claims in Florida & Potential Coverage Gaps For Florida 558 Proceedings

Triggering an insurer’s duty to defend is an important first step in any insurance coverage claim.  Typically, an insurer’s duty to defend is triggered when the insurer receives notice of a lawsuit filed against its policyholder.  But disputes can arise when a policyholder is required to respond to a claim that falls short of litigation, such as a subpoena, government investigation notice, or request to engage in pre-suit negotiations.

Such a scenario is common with construction defect claims in Florida, as Florida Statute § 558.004 requires claimants to provide a notice to a contractor of the basis for the construction defect lawsuit.  This notice, commonly referred to as a 558 Notice, also provides the contractor with the opportunity to inspect and cure the problem without incurring litigation costs.

Contractors typically provide a copy of the 558 Notice to their insurers, and demand that their insurers defend them against the construction defect claim.  Recognizing that a 558 Notice is a statutory prerequisite to a lawsuit, most insurers will assign counsel and get involved in the defense of the claim.  This approach makes sense, given that the insurer has potential exposure on a construction defect claim, both for defense costs as well as to provide indemnity for a judgment or settlement of the case.

A recent case in the Southern District of Florida, now on appeal to the Eleventh Circuit Court of Appeals, called into question the need for insurers to participate in 558 proceedings.  In Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 13-80831-CIV, 2015 WL 3539755, 2015 U.S. Dist. LEXIS 72466 (S.D. Fla. June 4, 2015), Judge Kenneth Marra ruled that an insurer was not required to provide a defense to a 558 Notice because such a notice did not constitute a “suit” as defined in the policy.  “Suit” was defined to include a “civil proceeding” as well as arbitration or any other “alternative dispute resolution proceeding”.  Judge Marra determined that a 558 proceeding was neither a civil proceeding, arbitration, nor an alternative dispute resolution proceeding.

The practical implication of the ruling is that the contractor was unable to obtain reimbursement from its insurer for the cost of the defending the 558 proceeding.  If the ruling is upheld by the Eleventh Circuit, it will change the way construction defect litigation is approached in Florida, a change that will benefit neither contractors nor insurers.

The point of a 558 proceeding is to provide a mechanism to resolve construction defect claims before they trigger an expensive litigation.  There is little question in my mind that a 558 proceeding is an alternative dispute resolution proceeding.  It is a proceeding that is designed to avoid the alternative, which is litigation.  Construction defect litigation is particularly expensive and time-consuming, as it requires extensive expert testimony and often involves various contractors and subcontractors pointing fingers at each other.  A 558 proceeding is an attempt to bring a quick and relatively inexpensive end to the dispute.

Contractors do not have to meaningfully participate in 558 proceedings.  Contractors can write 558 procedures out of their construction contracts or can minimally comply with the statute by spending little time or money trying to resolve claims in a 558 proceeding.  But contractors want to participate in 558 proceedings because they want to avoid construction defect litigation.  Insurers also want to avoid construction defect litigation because they ultimately pay for the cost to defend the litigation, and pay for most if not all of the judgment or settlement to resolve these lawsuits.

You can read more of my commentary on the Altman Contractors decision in this Insurance Law 360 article here.  I hope that the Eleventh Circuit reverses the trial court’s decision.  The decision should be reversed both as a matter of insurance policy interpretation, as well as public policy supporting the 558 process.  Of course, the Florida legislature could amend the 558 statute to specifically provide that the proceeding triggers general liability policies, but the legislature seems uninterested in doing so.  In fact, the legislature recently amended the statute (with an effective date of October 1, 2015) to essentially reaffirm the Altman Contractors’ ruling, but also allow insurers to amend their policies if they wish to provide coverage for 558 proceedings.  This amendment is yet another example of short-sighted legislative activity fueled by the insurance lobby.

For the time being, Florida insurers will have the option to save a few bucks and refuse to assist their policyholders with 558 proceedings.  Such an approach in my view is penny wise and pound foolish, as non-defending insurers will ultimately pay more once these claims inevitably go to litigation.  Contractors need to be aware of this potential coverage gap for 558 proceedings, and continue to provide notice but discuss with their insurer whether the insurer will provide a defense to the 558 proceeding.  If not, then the contractor needs to decide how much time and money should be invested in this process.  Part of the decision making process is consideration of whether the damages sought in the construction defect claim ultimately will be covered.  In that way, contractors can make informed decisions as to whether to invest money in the short term to try to resolve a claim or should dig in to defend – and potentially engage in a coverage battle with their insurer.

As always, good coverage counsel can help guide contractors through this process, wrought with plenty of insurer-buried landmines, and now with yet another insurance landmine for the uninformed contractor.